Overview of Final Salary Pensions

As surprises go, it was a good one. For weeks the City had been discussing quite what George Osborne might do to placate middle England when it came to the Budget. Stamp duty was an early topic under discussion, based on the number of column inches filled on the subject. Would the Chancellor reband the property tax to free up the sale of properties stuck in the £250,000-£300,000 bracket?

Then came the pre-announced £2,000 childcare tax break, a sop to those “hard working families” the occupant of Number 11 Downing Street and his next door neighbour are so keen on referencing.

In the days leading up to the speech, the focus was on the personal allowance. Would the minimum threshold – a favourite of Deputy Prime Minister Nick Clegg – be raised? Or would the Chancellor move to knock a penny off the 40p tax rate, to help those higher earners?

In the end – and it was the end, coming in the last five minutes of his 55-minute speech – it was pensioners who were to feel the full warmth of his pre-election Budget bear hug.

“I want to do more to support saving,” boomed Osborne. “And so . . . we will completely change the tax treatment of defined contribution pensions to bring it into line with the modern world.
“Most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years. The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots.”

And, with those four sentences, an industry that has operated in largely the same way for the past 90 years changed in a heartbeat. The industry had no idea what was coming. Companies big and small in the life insurance sector were not consulted ahead of the announcement, with chief executives across the City pulled out of meetings to be told what the Chancellor was proposing.

Even the Financial Conduct Authority (FCA), which regulates the pensions industry, seemed to be caught unawares. If the regulator knew far in advance what was to be said, why had it spent the weeks leading up to the speech hard at work on its tangental market study into the annuities sector?

The consequences for pensioners have filled newspapers and television news programmes in the days that have followed Wednesday’s Budget.

But little has been made about the consequences for the companies involved in the sector. Some will be more badly damaged than others as a result of the proposals and the ensuing consultation process will be key in establishing the exact parameters by which the new regime will operate and what companies will be allowed to do.

But, given the Chancellor made it clear he wants the new regime to be in place by April next year – a month before the general election, to ensure the structure he envisions sees the light of day – time is short to work on the detail.

The consultation document which was released shortly after the Budget sets out a 12-week consultation period, with all responses to be with the Treasury by June 11. The Treasury will then respond to this consultation before the summer recess, which begins on July 22. The legislation that is needed to enshrine the subsequent changes into law will then follow in the autumn. Ironically, that is a very similar time scale to the annuities market study the FCA is now undertaking, the result of February’s thematic review, which found the market to be dysfunctional.

As we report today, chief executives of major insurers have, in the days since the Budget, been petitioning both the FCA and the Prudential Regulation Authority for a stay of execution.

Martin Wheatley, chief executive of the FCA, has been asked to pause his study to allow insurers to focus on the Treasury process, with the argument being, how can the regulator determine the rights and wrongs of a sector when the goalposts are about to be radically moved?

It is believed Andrew Bailey, his opposite number at the PRA, has also been hearing from chief executives who are unhappy with the new proposals from a business perspective.

Wherever both consultations end up, and whatever the final rules, it is clear that, after the Chancellor’s initial fanfare of opening up the pension pots of millions of savers, for the companies who must now navigate their way through this uncertain and unfamiliar landscape, the months and years ahead are likely to turn into a muted symphony.